Who will benefit from nationalization of finance?

I put this up yesterday on DailyKos. It did not get much traction, but I think it is important to get people thinking about the issues raised. In short, the success of both the two-pronged bank bailout (TARP and the Fed’s largesse), and the stimulus bill, are going to depend on whether or not the U.S. economy is transformed. I don’t think there is much disagreement in the direction we need to shove the U.S. economy; BruceMcF has done a brilliant job of discussing some of the more important aspects of transportation.

The points I want to make is that there are two major obstacles to success. First, there is no coherent plan for marshalling the nation’s resources toward a specific goal. There has been no national goal set of getting to 20% wind energy by 2030, or what ever percentages and date you care to select. There has been no national goal set of reducing carbon emissions by 50% by 2030, or what ever percentages and date you care to select. There has been no national goal set of getting 50% of Americans in our cities to use urban rail transit by 2030, , or what ever percentages and date you care to select.

In short, there is no industrial policy. There is no national planning. Without national planning and an industrial policy, the continuation of the status quo is inevitable.

Second, we must squarely confront the cultural degradation of the American people that as followed from the past three decades’ triumph of speculation, usury, and economic rent. I favor Hamilton’s industrial society over Jefferson’s agrarianism, but I also think there is much good in hearkening to Jefferson’s wailings about turning Americans into speculative stock jobbers. In short, if we are to have an industrial renaissance, how do we find those individuals who actually understand the needs of an industrial enterprise, and how to bend the financial system to those needs, and place them in positions of leadership?

In a little-noticed editorial in the Financial Times of London last week, the financial oligarchy that rules the City of London signaled a major shift in the policies and practices of Anglo-American finance. The accelerating collapse of the real economy now “is harming the banks”, the editors of the FT opined, and therefore the government must seize control of insolvent banks and financial institutions.

The Lords of London have spoken, and nationalization of the financial systems of the United States and Britain will now proceed apace. Note the New York Times, falling into line today.

Nationalization may be a foregone conclusion, now that the people who matter have deemed it so, but nationalization is only a desperate last clawing of a mortally wounded imperium trapped snarling in a corner. The real question now is: who will benefit from nationalization?

If nationalization of the large banks and other institutions now proceeds along the lines already established by the Federal Reserve and the TARP, only the existing power structure, rocked back on its heels by the fury and ferociousness of the financial calamity created by their usury of three decades, will benefit. But most people recognize that it is no solution at all to return to the old ways of doing things: lending money to people to buy things they don’t need and which they otherwise would not be able to afford.

The key question is this: the American tax payers just bought the banking system. We are going to pay, with interest, upwards of three trillion dollars for it. A relative bargain actually. The question is what we are going to do with it now that we own it.

How that question is answered will entirely determine whether we will continue with an economy that ignores the challenges of the present, or whether we will build a new economy that allows us to face the challenges of the future. How that question is answered will entirely determine who lives and who dies in the next decade and more.

The outlines of a preferred future are rather clear. We need to create an economy based on renewable energy sources and livable urban cores, and incentivized by the widespread sharing of prosperity and economic resources. Anything else is a mockery of our claim to representative democracy.

To achieve this, there are some minimal requirements for our nationalized financial system. Above all, it must favor true industrial enterprise over usury, speculation, and economic rent. Moreover, industrial enterprise must be directed in such a way that the broad goals of renewable energy sources and livable urban cores are achieved. The best way to do this is to create a clear industrial policy and enforce it ruthlessly. In other words, national planning.

National planning is anathema to both wrong-wing and “progressive” market fundamentalists, but it is, frankly, the only way out of these crises. National planning is a major reason the U.S. economy did so well in the two decades after World War Two; and national planning came rather naturally to a generation of Americans who had been trained to transport, supply, maintain, and direct armies of millions on both sides of the globe simultaneously.

The vast industrial planning that rationed strategic resources, the factories that put Liberty ships to sea and B-17s in the air, the logistical infrastructure that moved supplies from the farms to the front lines, and the company supply sergeants who kept the track of the thousands of items their outfits needed — through it all, an entire generation learned to take the long view, think in big pictures, and visualize future events. When the war ended, millions of men and women brought those skills home to the cities and suburbs, and applied them every aspect of their lives from building companies to running households.

These skills and habits became an embedded part of American culture. The U.S. was always a place where people could re-create themselves and seize new futures; but this sharp new set of tools allowed us to pursue that trait with a vengeance. It's become a peculiarity of our character, this brash and pragmatic assumption that if you want to create a certain kind of future, you simply articulate the vision and start laying out the steps that will get you there. There aren't that many cultures in the world that offer such strong support for big ideas, elaborate logistical and organizational planning, and long-term foresight — yet, until you're outside America for a while, it's hard to notice how special this trait really is, or how strongly it defines us as a people.

Not surprisingly, as the United States abandoned national planning in favor of the theology of “the market knows best”, the U.S. economic position began to slip at an accelerating rate, until it became the collapse we now have to deal with.

The need for national planning is clearly seen in our inability, for three decades now, to kick the petroleum habit. The theology of free markets argued that the desired goal of energy independence could be achieved by tweaking a few government incentives and penalties, and letting market mechanisms handle the rest. That approach has been tried, and we all know what the results are. If anybody does not recognize that this approach has been a complete and miserable failure, they really have nothing useful to add to our national discourse.

Nationalizing the big banks and financial firms (let’s not leave out Goldman Sachs, agreed?) allows us to achieve a number of other important goals. First of all, it will make it much easier to direct flows of credit to those individuals and companies that are actually working on building our new economy based on renewable energy sources and livable urban cores. This is no small consideration, given how many hundreds of billions of dollars were mis-allocated to mergers and acquisitions, and schemes of arbitrage and speculation, that did absolutely nothing to increase real economic potential, while entrepreneurs seeking to build new fuel efficient vehicles and renewable energy sources, were forced to beg for financing.

Second, nationalizing the big banks and financial firms allows us to remove from the executive suites and boardrooms the legions of f#@k-ups that up until last year most of us were fawning over as “masters of the universe.” We will be the owners, so we will be able to decide who is fired and hired. It signifies a deep cultural flaw that someone like Merrill Lynch CEO John Thain was able to maintain a grasp on the levers of power this far into the collapse. There has to be a national catharsis that will only come with wholesale firings of everyone from CEOs and CFOs to executive vice-presidents. These people have no idea what a real industrial enterprise is, and what is required to nurture and manage one. They have made a very lucrative living for the past three decades as financial hucksters, devising ever more elaborate schemes for skimming off a frightfully growing amount of financial paper with less and less connection to real economic activity. They will all have to be re-educated some how, but for now the key thing is to get them out of the way so we can proceed with a real economic recovery.

We need to replace these arrogant failures with their out-sized sense of entitlement, with people like Jerome a Paris, who understand that banking and finance needs to return to being dull and mundane, focused entirely on project financing. As Jerome explained in October 2006:

you finance a specific asset, and you get repaid only from the revenues generated by that asset, without recourse to the investors that own the project. This is a financing technique that works well for project with well identified assets with high initial investment costs, and strong cash flows after that, like big infrastructure items (toll bridges, pipelines) and energy assets (oil fields, power plants).

Third, nationalizing the big banks and financial firms will allow us to implement a quick and simple economic stimulus that won’t cost the U.S. Treasury a single cent. We own the big banks and financial firms, so we can just decide to charge ourselves less for the credit we lend to ourselves. That’s right: bring the terms of credit cards back down to earth. Get rid of the eye-popping interest rates over 10%, get rid of the fees and penalties, and the other mischievous means for bilking the public, and we can literally save tens of millions of Americans billions of dollars each month immediately. We could then do the same thing for student loans.

Fourth, similar to the third point, since we own the big banks and financial firms, we can forgive the debt we owe ourselves. Government debt, that is. Depository institutions (i.e., banks) own 1.22% of the $10.025 trillion in federal debt outstanding as of June 2008. Insurance companies own another 1.30%. But the Federal Reserve and intergovernmental holdings own nearly half – 49.37%. Since the Federal Reserve is actually owned by the member banks of each Federal Reserve District, we will in effect own a large chunk of the Federal Reserve. So, we can simply forgive ourselves our national debt. Or, at the very least, lower the interest rate we charge ourselves. In Fiscal Year 2008, the U. S. Government paid $451.1 billion in interest payments to the holders of the National Debt. So far this fiscal year, it has paid out $135.3 billion in interest payments, and with deficits of over $1.0 trillion for this year and next, it is likely that annual interest payment will be approaching $600 billion by 2011.

Fifth, once we own the big banks and financial firms, we can fire all the lobbyists, who have done so much to screw so many of us, through the so called bankruptcy reform of 2005. As Ian Walsh points out, “Having a stimulus bill without bankruptcy reform is like organizing a bucket brigade on a sinking ship without sending a crew down to patch the hull.”

Finally, by nationalizing the big banks and financial firms, we will simply be giving ourselves a much, much better deal than we have so far. As Barry Ritholtz argues in the cases of Bank of America and Citigroup, we have already provided more in rescue funds than what those institutions are worth.

And in exchange for this foolish investment, taxpayers have received just 6% of Bank of America, and 7.8% of Citigroup. This is absurd. How 120% of a company’s market cap yields a single digit ownership stake is beyond my comprehension.

Nationalization is a fact. Let’s stop pretending otherwise and make sure it benefits us, the new owners.

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Comments

We have known for over a hundred years what the finance system does when left to its own devices. In the 1930's, government stood up to its responsibilities and stopped leaving them to their own devices and created a finance sector that was suitably boring and a tremendous complement to real productive activity.

But over the past fifty years we have been incrementally allowing things to slide in reverse, and by 1999, we were back to leaving the finance sector to its own devices. And of course, a Bank Panic in under a decade is the entirely predictable result.

Government broke the finance sector ... by leaving it to its own devices, which never works to serve producers or consumers ... and so we bought it.

The only question left now is how many god damned times to we want to pay for the same pot, because if we pay for the replacement and then hand the replacement to the same two year old who adores the sound of pottery shattering, we are going to have to buy it again ... and again ... and again ... until we stop doing that.

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and if our government represents us....a good way to clean house of all of these little feudal lords called executives.

I wrote a piece A Little History of Financial Crises in October pointing out the ones who dealt with their financial crisis, also connected to a housing bubble, was Sweden, for the least amount of pain and money.

They also didn't try to save shareholders or executives.

the problem is our government is still so corrupt, we cannot get policy that is based objectively on what works. It's like a Medusa of special interests.

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Now, in regard to interest payments, etc. We need to modify our monetary system to never be based on usury again. Usury (or interest) only creates money out of money. That doesn't produce or benefit us whatsoever, at least in the long run that's for sure.

Perhaps if we educate people not just simply on the fact that we have over $10 trillion in debt, but how our money (the stuff in your pocket or on a computer screen) is equal to all the debts of this country (the government and individuals). And that this debt represents only principal and not interest. We can then clue people in that there isn't any interest money in the system to pay their debt. Thus, we need to wipe out this monetary system, nationalize the banks, and start over.

First, let's start getting people to ask, "Where's the Interest?"

www.WheresTheInterest.com

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